The present invention relates generally to the field of lending, and more particularly, lending conducted through a conduit lender so as to enable the conduit lender to maintain a flat position. In preferred embodiments, the present invention is directed to systems and methods for providing borrow coverage services to clients short selling securities.
A short sale of a security is a transaction in which a seller borrows securities in order to sell the borrowed securities in anticipation of a decrease in the market price. The seller will then in turn buy the security back at a lower price to earn a profit, which is calculated as the difference between the initial selling price and the repurchase price, and return the securities to the lender.
Of course, there are financial risks involved with this strategy, as with any investment strategy. With short sales, if the price of the securities increases, the seller will take a loss on the sale. Also, when borrowing the securities, the interest rates offered by typical lenders in short sales, e.g., prime brokerage firms, may be extremely high due to the risk involved. While there are lenders which offer competitive rates, there are some borrowers that cannot interface directly with certain lenders that are in a position to provide more competitive loan rates. However, these same lenders may interface directly with higher institutions carrying a strong credit rating (e.g., a large banking entity) in which the foregoing disadvantaged borrowers have established relationships. Accordingly, there is a desire to leverage the foregoing established relationships between higher institutions and disadvantaged borrowers to allow for the availability of more competitive loan rates, particularly in the arena of borrow coverage for clients of the higher institution engaged in the short selling of securities.
The solution presented by the present invention is based on a “conduit lending” or “riskless principal” transaction, whereby a loan made by lenders to the banking entity is onward delivered to borrowers, and whereby the collateral delivered by borrowers to the banking entity is onward delivered to lenders, thereby perfecting a net flat position for the banking entity.